OLIVER LETWIN may see little reason to be cheerful this morning but a glance at the latest forecasts from ABN Amro might make him feel rather better. Michael Howard’s Shadow Chancellor could be forgiven, on reading the gloomy predictions, for deciding that he had a lucky escape.
The scenario that ABN Amro outlines hardly equates to the proud boasts that we have heard from Gordon Brown about the solid state of the economy. But the bank is not so far out of kilter with other economists as to be dismissed as merely scaremongering. There is genuine reason to be fearful about what lies ahead.
If the politicians have been paying attention to the public as they went about their electioneering, they will already have heard the anecdotal evidence that should have made them nervous. A chat to high street retailers would have left them in no doubt that consumer spending was weakening. Worries about job losses are rife, and not confined to the area around Longbridge.
The increased levels of consumer debt which have been causing concern at the Bank of England for many months are now turning nasty. Five successive increases in interest rates are taking their toll and levels of bad debt are rising. In the housing market, repossessions are rising. The explanations are simple. Cheap money provided irresistible temptation to people who find themselves in trouble when it becomes more expensive. A mortgage that was taken out at a fixed or discount rate for three years might have seemed eminently affordable. But for those who are now coming to the end of such a three-year deal, the increased charges they are facing can be crippling. At a stroke, they can and are eating up previously disposable income that would have found its way into the shops.
What is in those shops is increasingly coming from China, India or eastern Europe. Consumers have rejoiced at the inflow of cheap goods but now the effect on UK jobs is being felt increasingly. It is no longer only textiles, electrical goods and the like which are being shipped in but heavier goods, such as furniture, are now arriving in Britain by the container load.
The Government has rightly eschewed any form of protectionism but the threat to British jobs is becoming ever greater. The growing numbers of Chinese entrepreneurs are cropping up to under-cut local businesses in areas which might previously have seemed to be outside their scope. One UK firm that specialises in high quality woodwork relates how it fully expects to see its hotel clients place bulk orders for chairs with China, but was horrified recently to find a Chinese company quoting for providing fittings that would be specially tailored for each room. It was prepared to send staff to the UK to finish the work and even then its bill was half that of the UK firm. The contract went to China.
It may be that the period of cheap ‘China price’ may soon come to an end, with a consequent nasty jolt to inflation. In the meantime, however, UK jobns will continue to be lost. The experience is not unique to Britain: the United States is feeling the pain of same trend. Yesterday’s survey of corporate leaders from Goldman Sachs showed US corporate chiefs with their confidence sliding away. If the US does weaken badly, then the UK downturn will be even worse than would otherwise have been the case. Gordon Brown will hope that the ABN Amro nightmare scenario is nothing more than a bad dream. It is not. The Brown Chancellorship has laid the foundations for what could be a grim few years. And unlike Mr Letwin, he cannot turn over and go back to sleep.
Bruce on a winning streak
BRUCE WASSERSTEIN has succeeded in doing what looked to be impossible and prised Lazards away from the grip of Michel David-Weill. The flotation has gone ahead, despite suspicions that the mercurial Frenchman might have a last-minute change of heart and find a way of blocking Mr Wasserstein’s plans.
Admittedly, the price was at the bottom end of the expected range but, considering the scepticism that had been mooted about the likely appetite for the float, it amounts to a triumph for Mr Wasserstein and his Lazards colleagues.
The move is transformational for the bank, not just because, for the first time in its 150-year history, it becomes a publicly quoted company but because it represents a complete break with M David-Weill and the family that founded Lazards.
After the unedifying wrangling that has gone on between M David-Weill and Mr Wasserstein, the man he chose to lead the bank, the flotation should enable Lazards to concentrate on building its business.
Mr Wasserstein, whose name still hangs over another investment bank to which it was expensively attached, Dresdner Kleinwort Wasserstein, has recruited new talent to the Lazards team he inherited. Some of it has been acquired at a very high price, a fact that infuriated M David-Weill, who saw guaranteed bonuses going to bankers in place of dividends being paid to the bank’s owners.
It was the heavy fee structure that caused some doubts about the potential success of a flotation. Last year almost three quarters of the bank’s revenues went straight out in the form of salaries and bonuses. If such a high proportion of the profits was to go to the bankers, what would be the attraction to shareholders? But the Lazards roadshow successfully convinced investors that the operational gearing was such that the potential return for shareholders from any upturn in income would be substantial.
And the bank is confident that it can increase those revenues. The business that has been floated is an independent, advisory house, with capital markets and asset management left behind. Lazards believes that there it should benefit from a growing wariness amongst corporate clients of the giant investment banks and their potential conflicts of interest. “Bid ’em up Bruce”, with a holding of almost 12 per cent in the company, looks set to win once more.
Lessons from America
HAVING tasted blood at Enron and WorldCom, America’s fraudbusters are heading mob handed for the equally opaque and suspect insurance industry. There is plenty of smoke.
The corruption of underwriters having to make payments to insurance brokers, who were supposed to act solely for clients, went right to the top. It seemed almost to have become industry practice.
AIG’s peccadillos under nearly half a century of Hank Greenberg’s management have been shocking. Thus far, they seem more like schemes to appease the vanity of an over-mighty boss than crimes with intended victims.
The first reaction should be give carte blanche to accounting regulators to end the special practices that have made insurance company accounts unintelligible, even to expert non-specialist accountants. Mystery covers many a sin.
Instead, the FBI has assigned scores of agents to the industry, which it claims to have been monitoring for a year, and is prepared to fan out to wherever dodgy contracts lead it. US corporate law has a reputation for long absences followed by aggressive overkill. This can hurt confidence, negating benefits from clean-up but a Republican President does not want to be outflanked by Eliot Spitzer.
Corporate malpractice, the province of the SEC, is also distinct from individual financial crime. Criminals should be punished for crime, not investors who are often victims. That is a lesson the UK Financial Services Authority needs to learn too.
- AFTER what one shareholder described as “a murky assassination”, the victim appeared bruised but unbowed at Prudential’s annual meeting yesterday. Jonathan Bloomer, the axed chief executive, was rightly determined to report to shareholders on the good health of the business and reiterate his disappointment to be leaving, even if that might cause some embarrassment to the directors who had turned on him. It was a brave performance from a man who believed that results should be what counts rather than popularity.
